Heroic Effort

Click here to see the 2009 Builder 100 list.

Most builders were happy simply to escape 2009 alive after their industry’s production and sales last year sank to levels that haven’t been seen since the early 1940s. The largest companies suffered along with their smaller competitors, as our annual Builder 100 survey all too vividly attests. Many builders are still just hanging on, and profitability continues to be elusive. But some builders successfully probed their markets for growth opportunities and positioned themselves to exploit business conditions as they improve.

The Olson Co. is a perfect example. While its closings and revenue slumped again last year, it has adjusted its strategy to build closer to where people want to live and work, which more frequently means entering into public-private redevelopment projects with a mass-transit component. “The fog has lifted slightly,” Steve Olson, chairman and CEO of this Seal Beach. Calif.–based builder, says about his markets’ selling climate, even though The Olson Co.’s production currently stands at less than two-thirds of its peak.

The housing downturn has also ushered in a new day at Alabama’s Hunter Communities. “The recession has sharpened our pencils,” says CEO Mark Hunter, “but we’ve had to work twice as hard to get the same results as before.” His company is benefiting from its decision to cut prices by as much as $30,000 below what they were two years ago. And the builder’s operations have become far more efficient. The company has reduced its cycle time from 48 to 37 days, from framing package to completion. Hunter recently began its biggest project to date, building on 350 lots at Savannah, a new community in Triana, Ala.

Building for first-time buyers has become a notable common denominator among builders that have managed to stem the market tide. In many cases, these builders have developed a new generation of house designs, often with flexible spaces.

The following pages profile four companies that are weathering the storm and gearing up for growth. Their game plans differ and their financing is diverse. But each has simplified its operations and is focusing intensely on customer service that extends even beyond the closing. They also understand that buyer demand is fickle and fragile, and future success is anything but assured. “There’s little room for error,” says Tom Krobot of Ashton Woods USA. “We have to do a lot of things well.”

Digging Out

Ashton Woods USA, more stable financially, has growth on its mind again.

Stronger Framing: CEO Tom Krobot has led the transformation of Ashton Woods USA, from its financing to product assortment.

Credit: Russell Kaye/Aurora Select

Remarkably, throughout its financial travails, the Roswell, Ga.–based company never stopped building and selling houses. It got a much-needed reprieve last year when negotiations with bondholders lowered the company’s debt. Plus, the builder received a $20 million infusion from its parent Great Gulf Group of Canada and a $95 million credit line to finance its ongoing construction activities.

Customer Outreach

Ashton Woods not only managed to close 1,319 homes last year, making it the 24th-largest home builder in the country; its operations also “made a little money,” says Krobot, who expects another 10 percent to 20 percent increase in closings this year. Despite his optimism, Krobot acknowledges that expectations must be tempered due to the company’s exposure in markets whose construction activities are more constrained. “Atlanta went from a peak of 65,000 permits to 4,800 last year; the same was true in Phoenix,” says Krobot, referring to two of his company’s primary markets. “I read somewhere that 28 percent of all homes in Orlando, Fla., are vacant. Vacant! It’s very difficult right now because you’re fighting foreclosures and unemployment. There’s little room for error and little elasticity in pricing. And you have to do a lot of little things well.”

(C)JOHN TROTTO 2009

Credit: Courtesy Ashton Woods USA

And there’s no question that Ashton Woods is paying more attention to what customers want these days. “When you open a community, people aren’t waiting in line anymore. You have to stay with them longer to get them to close,” says Krobot. For starters the company has “refreshed” its website, where more than half of its customers go first to look for houses.

Cost Concerns

For several years, Ashton Woods has distinguished itself by building houses to standards set by Masco Home Services’ Environments For Living program, which emphasizes pre-construction planning and energy-efficient construction. The builder took the performance of its homes up a notch at the Enclave at Riverwalk community in Atlanta, its first community to include an irrigation system that draws from rainwater catchment cisterns. That system, which adds about $1,500 to the cost of each home, will likely be included in future Ashton Woods communities, says senior vice president of operations Ralph Farrell.

But the builder’s biggest payoff may have come from revising its house plans, a year-long process. Krobot says the company dropped “a couple hundred” house plans and 60 to 70 others were modified. More important, the builder introduced 150 new plans, including 1,500- to 1,800-square-foot models aimed at first-time and move-up buyers.

The redesign effort also focused on lowering home prices to give the company a competitive edge in the market. Value-engineering has cut the prices of many of its houses by as much as $2,000, without sacrificing square footage. The addition of a structural engineer to the staff last year, says Krobot, has been a “big help” in quantifying costs.

Running numbers is central to Ashton Woods’ land strategy, too. It refrained from buying lots from 2007 through 2009, and rarely lets land reserves rise above three years’ of projected construction. (Its current lot count fluctuates between 4,300 and 4,800.) In Texas and Florida, Ashton Woods is optioning land. But in Atlanta and Phoenix, where the builder has only about 18 months’ worth of lots, it’s been paying cash for finished lots from banks, developers, landowners, and other builders. “There’s a lot of distressed inventory, finished or almost finished, available out there,” says Krobot.

Touch Points

El Paso’s Desert View Homes gets closer to its customers.

On Their Own: Owner Randy O'Leary thinks community autonomy is critical to Desert View Homes' success.

Credit: Gabrielle Revere

“We added too many amenities,” O’Leary concedes. The result? Desert View got stuck with a lot of inventory it couldn’t sell. And Desert View, like many of its competitors, had to drop its prices, sometimes by as much as $35,000 per house in Colorado. O’Leary vows that he won’t make the same mistake again. Desert View’s homes range in price from $89,000 in El Paso to $260,000 in Colorado, where it sells under the banner Aspen View Homes. O’Leary says his company made “huge” changes to its products last year, mostly by simplifying their designs, with an eye toward being able to answer the question that occupies most buyers’ minds: “How much down and how much per month?”

Nearly one-third of the company’s prospects in El Paso don’t qualify for a mortgage initially, compared to 7 percent to 10 percent in Colorado and around 20 percent in New Mexico. So about a year ago, Desert View started a Buyers Club, with counselors who walk customers through the mortgage process and show them how to clean up their credit. O’Leary’s goal is to lower the nonqualified among his customers to 10 percent.

Accountable Communities

Facing Reality: Desert View has curtailed its amenities to keep prices down.

Credit: Courtesy Desert View Homes

These personnel moves are in line with a cost-cutting drive that O’Leary initiated more than a year ago. The company has been installing new operating software for its back-office, purchasing, and sales functions. As of late February, Desert View had achieved about half of its expense-reduction goals and through the remainder of the year will focus on shortening time lines for construction and the loan process.

It takes Desert View 131 days, from start to completion, to build a house, and last year it finished 97 percent of its starts on schedule. O’Leary would like to lower that by five days per quarter this year, but he points out that construction cycle time is less of a problem than the time it takes to get customers to the finish line, which now runs 19 days, on average, from completion to closing.

Hometown Growth

Right now, O’Leary says he’s not interested in expanding Desert View beyond its three current markets. “I’m not masochistic,” he laughs. But he is looking to increase the company’s presence in its existing markets. “We have 17 percent market share in El Paso, and smaller percentages in the other two markets, so there’s room to grow.” Dubbed “America’s safest city,” based on local and federal crime data, El Paso is across the border from Juarez, Mexico, where drug cartel-related violence has caused an estimated 30,000 of its citizens to flee to the U.S. O’Leary believes this migration presents sales opportunities for Desert View, which now offers Spanish-language versions of its marketing literature and has hired more Spanish-speaking salespeople.

Land Grab

Fischer Homes finds growth in other builders’ soil.

Pursuing Sustainable Demand: Fischer Homes' COO Bob Hawksley has orchestrated many timely land deals.

Credit: Andrew Spear/Aurora Select

The Crestview Hills, Ky.–based company deepened its Ohio presence when, in early 2008, it acquired 280 lots in four communities from Centex. Later that year, Fischer paid 20 cents on the dollar to acquire 390 finished lots from Beazer Homes in Cincinnati, Dayton, and Columbus, Ohio; it paid nothing for another 1,100 raw lots that Beazer controlled, according to Fischer’s president and COO Bob Hawksley.

Continuing this pattern of strategic acquisitions, Fischer entered Indianapolis last summer by securing options on an estimated 500 lots.

With the addition of new markets and cheap land, Fischer closed 696 homes in 2009, a number it expects to increase to 1,000 in 2010. That figure should include 200 closings in Columbus, where the company now sells in 30 communities. Jon Jasper, who manages Fischer’s Columbus division, told The Columbus Dispatch in late February that the builder is projecting 25 percent growth in that market this year. Fischer also expects to close between 80 and 100 homes in Indianapolis, up “from zero” last year, says Hawksley. Hawksley also projects market share gains in Cincinnati through competitive attrition.

Land As Profit Center

The company has access to plenty of land to accommodate its longer-range growth plans: just under 12,000 lots. Yet, it might surprise some people to hear Hawksley say that one of the reasons why Fischer flourished when others foundered was its aversion to stockpiling undeveloped real estate. “We stayed away from land we couldn’t make work,” he explains. “If you’re a home builder and develop raw land and put the lot cost into your home building costs plus 20 percent, you’re not going to get an appropriate return on your investment.

“Plus,” he continues, “people in the Midwest are conservative. They aren’t going to pay four times their incomes for a house.”

Fischer treats land as a profit center. Its land development department is a separate entity within the company, with its own president who reports to Hawksley.

Hawksley adds that during the housing downturn Fischer has “stayed true” to developers that provide 45 percent of its finished lots (the company develops the rest internally). “We didn’t threaten to walk away from communities if developers didn’t lower their prices, even though most of them eventually did.” Treating its developers with respect, including continuing to build spec homes in these communities “so that they looked active,” says Hawksley, gave Fischer a leg up when it came time to pick up lots from which other builders had walked.

Avoided Subprime Trap

Active Expansion: Fischer Homes has been acquiring lots aggressively over the past two years and expects its closings to increase by more than 40 percent in 2010.

Credit: Courtesy Fischer Homes

Perhaps the smartest move Fischer made during the boom was to avoid subprime financing, and to resist offering down-payment assistance to first-time and move-up buyers, Fischer’s target customers. Consequently, Fischer’s communities have had few foreclosure or appraisal problems.

Hawksley’s takeaway from the boom and bust cycle is to not fall into the trap of believing that buyer demand is bottomless.

He also expects builders chastened by the recession to adjust their expansion plans within more realistic parameters. “Builders have to pursue sustainable demand,” he says, and realize that “running above that is going to be short-lived.”

Keep It Simple

Price, quality, and scheduling”have propelled the rapid expansion of DSLD Homes.

Dizzying Growth: Pwner Saun Sullivan has seen DSLD Homes' sales go from 51 units in 2008 to 238 last year.

Credit: Sean Gardner/Aurora Select

Sullivan, now 37, had been building homes since he got out of college in 2000. He had taken PCC’s yearly production to around 450 units when Horton paid an estimated $65 million to acquire its assets.

As part of the deal, Sullivan and his partner, land developer H. Allen Thomason, who still develops lots for Horton, signed a two-year noncompete clause. But Sullivan discovered that he still had a building itch. His portion of the Horton sale—plus lines of credit from three banks totaling more than $14 million—provided the capital he needed to launch DSLD Homes in 2008. In its first year, the company, which didn’t start building until the summer, sold 51 homes. In 2009, it ramped up to 238 sales. And this year DSLD expects to sell 350 homes in six Louisiana parishes and one county in Mississippi.

Quicker Delivery

Sullivan is coy about his company’s success at a time when the state’s economy has been struggling, and the national economy is in recession. He jokes that he doesn’t even remember what the initials of his company’s name stand for. “That shows you the extensive planning we went through.” As for future planning, it’s “day to day,” he insists.

But unlike most startup builders, DSLD Homes had PCC Homes’ operational blueprint to work from. A key to the company’s success is evenflow construction, the idea for which Sullivan says he “stole” from Quadrant Homes in the Pacific Northwest. (Sullivan’s father-in-law works for Quadrant’s parent Weyerhaeuser.)

Quick Turnaround: DSLD's cycle time is 45 days from framing to completion. It also rewards its trade partners with prompt payment.

Credit: Courtesy DSLD

Grading Subs

This evenflow approach extends to DSLD’s subs and suppliers. Sullivan says that the pro dealer 84 Lumber supplies much of his company’s building materials and receives payment via a direct-deposit account three days after products are delivered. Subs are paid the same way, too, as they complete their phases. Using this process, the company saves time and money by minimizing paperwork and billing disputes.

Sullivan says “price, quality, and scheduling” are what separate his homes from the competition. About one-third of what DSLD builds are spec homes, to accommodate buyers who need to move in quickly. And the builder’s quality control includes a points-system program in which subs grade the company and the trades that precede them in construction. “We haven’t had a dry run [where a sub shows up on a jobsite but can’t work] forever,” says Sullivan.

“Saun recognized early on that the scores relate to the construction process,” says Ed Caldeira, the quality-control consultant who has helped DSLD set up its grading system. He observes that this system is particularly helpful in elevating the productivity of “in-between” subs, “who are neither mediocre nor great.” “They are coached for improvement, and they either get there or they don’t get work in the future,” say Caldeira.

Sullivan can’t say how big he wants his company to get. “We don’t know yet what our Peter Principle is.” He admires how larger builders such as NVR and Fulton Homes operate, but for now he’s content to expand within his company’s existing markets. “They’ve figured out some things, and the beauty is how simple their operation is,” says Caldeira.

DSLD’s land holdings are modest; only about 215 lots valued at $22 million as of late February. It’s only buying finished lots right now because, Sullivan explains, “our banks don’t want us to develop, and there’s plenty of lots out there.” Plus, Sullivan isn’t sure that the recession is over. He thinks there could be another “shock” to the economy in the second half of the year, now that the federal government is out of the mortgage-purchasing business.

“Too many builders are still taking things for granted, until everything blows up in their faces again,” he says.